NCUA Releases 2023 Supervisory Priorities
While the new year brings with it resolutions and new beginnings, NCUA started its new year establishing its 2023 Supervisory Priorities (Priorities). NCUA introduces these supervisory priorities in the Letter to Credit Unions 23-CU-01, identifying new and existing initiatives the agency will continue in 2023. NCUA discusses several house-keeping issues before diving into its priorities. NCUA highlights it will conduct both examination and supervision activities onsite and offsite. The NCUA Exam Flexibility program and the Small Credit Union Exam Program will continue as well.
Supervisory Priorities for 2023
Interest Rate Risk
NCUA identifies the elevated interest rate environment as one of the key priorities for NCUA. NCUA maintains this environment poses a risk to credit unions as a “…sharp rise in rates has amplified market risk because a credit union’s assets and liabilities do not reprice equally.” This risk may threaten a credit union’s net economic value and projected earnings. NCUA also highlights the addition of the Sensitivity to Market Risk component to the CAMELS rating system. NCUA emphasizes interest rate risk is separate from the liquidity risk a credit union may face.
The Priorities also address what a competent credit union should consider managing interest rate risk: (1) key assumptions and related data sets are reasonable and well documented; (2) the credit union’s overall level of IRR exposure is properly measured and controlled; (3) results are communicated to decision-makers and the board of directors; and (4) proactive action is taken to remain within safe and sound policy limits.
NAFCU’s Regulatory Compliance team wrote an informative compliance blog on NCUA’s revised interest rate risk framework. This blog discusses interest rate risk, NCUA’s new guidance, and what changes NCUA has made to its interest rate risk framework.
Liquidity Risk
NCUA notes higher interest rates may impact credit union liquidity risk. Higher interest rates may affect prepayments for loans and investment holdings and credit union shares. Agency examiners assessing the liquidity component of CAMELs will review a credit union’s liquidity versus funding needs, credit union policies and procedures, and a credit union’s existing liquidity risk management framework. Examiners will look for the following when reviewing a credit union’s liquidity risk management: (1) the potential effects of changing interest rates on the market value of assets and borrowing capacity; (2) scenario analysis for liquidity risk modeling, including possible member share migrations (for example, shifts from core deposits into more rate-sensitive accounts); (3) scenario analysis for changes in cash flow projections for an appropriate range of relevant factors (for example, changing prepayment speeds); and (4) the appropriateness of contingency funding plans to address any plausible unexpected liquidity shortfalls.
Credit Risk
NCUA recognizes existing inflationary pressures and rising interest rates are placing downward pressure on credit union members. The effects of inflation, a (potential) increase in unemployment rates, and higher interest rates may pose a threat to the ability of members to repay outstanding debt with the potential for higher loan payments if interest rates continue to tick upward. To address these potential issues, NCUA will review the safety and soundness of credit union lending programs, changes made to loan underwriting standards and portfolio monitoring practices, and credit union loan workout strategies.
Fraud Prevention and Detection
Fraud prevention and detection is a new priority for NCUA this year. NCUA will circulate a management questionnaire with the hope the questionnaire will identify fraud red flags, material supervisory blind spots, and other risk areas. Credit unions will receive this questionnaire in the pre-examination planning stage. In some circumstances, a credit union’s state supervisory authority may use the same or similar questionnaire, in which case both the state and federal examiners will communicate to avoid any redundancies. NCUA notes credit unions will receive the questionnaire through the MERIT’s survey function where either the credit union CEO or another executive will oversee the completion and return of the questionnaire through the MERIT survey function.
Information Security (Cybersecurity)
NCUA reminds credit unions the evolving threat of cybersecurity. The agency is looking to ensure credit unions have adequate information security programs. In addition, NCUA plans to use its Information Security Examination procedures in 2023. The Priorities note a credit union has the option to conduct self-assessments of its cybersecurity internal controls using the Automated Cybersecurity Evaluation Toolbox.
While on the topic of information security, this may be a good time to review the Consumer Financial Protection Bureau’s statement on information security and unfair, deceptive or abusive act or practices (UDAAP). NAFCU’s director of regulatory compliance, Nick St. John, blogged about this issue here.
Consumer Financial Protection
NCUA examiners will continue to review a credit union’s compliance with the Flood Disaster Protection Act. Examiners will review compliance with the disclosure requirements. NCUA stresses this focus “...as [the agency] continue[s] to evolve [their] understanding of the impact of climate-related financial risk on credit unions, credit union members, and the Share Insurance Fund.” The Priorities mention several other areas of focus such as overdraft programs, fair lending (review of residential real estate appraisal for any bias), the Truth in Lending Act, and the Fair Credit Reporting Act. In continuing its focus from 2022 on overdraft programs when NCUA requested information regarding credit unions’ policies and procedures governing overdraft programs, NCUA “will expand the review of credit unions’ overdraft programs.” This review will include website advertising, balance calculation methods, and settlement processes. Another consumer financial focus relating to overdraft programs are the adjustments made by credit unions “to address consumer compliance risk and potential consumer harm from unanticipated overdraft fees.”
NCUA also highlights its two priorities relating to fair lending. First, NCUA hopes to address the steering or loan pricing discrimination risk factors. Footnote 2 of the Priorities maintains steering occurs when a credit union steers “…an applicant or potential applicant to a loan product or feature with less favorable terms because of his or her race, color, religion, sex, or other prohibited basis is illegal under the federal fair lending laws.” Second, NCUA will also focus on residential real estate appraisals to ensure such appraisals are consistent and fair.
Lastly, NCUA will review Truth in Lending compliance relating to auto lending for credit unions that experienced high auto loan growth over the past year. Examiners will also study credit practices such as furnishing, adverse action notices, risk-based pricing, and consumer rights disclosures.
Other Updates
Current Expected Credit Loss Implementation
While concluding its 2023 Supervisory Priorities, NCUA also took the time to provide updates on other important issues. NCUA reminds credit unions that they are required to implement the Current Expected Credit Loss (CECL) for the financial reporting year starting after December 15, 2022. The update reminds federally insured credit unions that depending on asset size some credit unions are not required to implement CECL.
Under the NCUA’s CECL Transition Rule, federally insured credit unions with assets of less than $10 million are generally not required to implement CECL. For credit unions below this threshold, the rule requires “any reasonable reserve methodology (incurred loss), provided it adequately covers known and probable loan losses.” Federally insured, state-chartered credit unions should refer to state law on Generally Accepted Accounting Principles (GAAP) requirements and CECL standard applicability, as those requirements may be more restrictive.
Moreover, NCUA examiners will study a credit union’s Allowance for Credit Losses (ACL) by weighing a credit union’s ACL policies and procedures, documentation of an ACL reserving methodology, and adherence to GAAP (if applicable).
NAFCU has written on this CECL as well. The Regulatory Compliance team wrote a compliance blog discussing the CECL Tool and its impact on credit unions.
Succession Planning
NCUA also highlights the importance of succession planning, sharing its finding that “inadequate succession planning is often a reason for credit union consolidation.” NCUA notes examiners will review credit union’s succession plans for senior leaders. However, NCUA stresses its examiners will not review anything beyond what is normally considered under the Management component of the CAMELS rating and NCUA will not issue any administrative findings if a credit union lacks succession planning unless a credit union is in violation of its own policies.
Support for Small Credit Unions and Minority Depository Institutions
NCUA discusses continuing its Small Credit Unions and Minority Depository Institutions support programs. In addition, examiners have developed MDI-specific exam procedures.
Post-Examination Survey
NCUA will continue welcoming feedback from credit unions through its post-examination survey. A credit union may also record exit meetings with examiners so long as the credit union follows applicable laws and NCUA receives a copy of the recording.
Conclusion
NAFCU will continue to monitor NCUA's 2023 Supervisory Priorities and their impact. If there are any remaining questions, please do not hesitate to contact NAFCU’s Regulatory Compliance team at compliance@nafcu.org
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